Banks face crackdown on 'rip-off' credit card and loan insurance

The Competition Commission signalled a major clampdown on the sale of insurance to cover credit card and loan payments yesterday following stinging criticism of the excessive profits made by banks and major lenders.

The commission said it was difficult for consumers to compare the cost of payment protection insurance (PPI) and that they were often pressured into buying the cover or risked losing access to loans.

The report was welcomed by consumer groups and Citizens Advice, which said the billions in excess profits made by the banking industry in the last decade had pushed many people into poverty. A spokeswoman for Citizens Advice said the report confirmed its investigation in 2005 that "PPI is over-expensive and often unsuitable and that lenders are ripping off, rather than looking after, their customers."

The inquiry chairman, Peter Davis, said he found a lack of competition allowed banks to maintain huge profit margins on the sale of PPI. The study revealed the industry made annual excess profits of £1.4bn from the insurance on sales of £3.4bn. The insurance covers customers who may be unable to keep up payments on their mortgages, loans and credit cards if they are made redundant or fall sick.

Davis said: "The way PPI is sold as an add-on to the loan or other credit product means distributors escape the pressure they face from competing suppliers."

He said banks, which had constructed a complex form of insurance, failed to compete on either price or quality. Only 20% of customers made a claim on their insurance, with figures for credit cards falling to 11%.

Officials at the commission will spend the next six months discussing with the finance industry "various remedies", including a requirement for all policies to be reviewed annually and the outright ban on some more controversial products.

The most popular form of PPI is the single-premium, front-loaded policy commonly sold with personal loans. It can add up to a third to the cost of the loan.

In March 2004 the Guardian revealed that Barclays made more than 10% of its worldwide profits from the sale of PPI in the UK. The investigation also revealed that Barclays, along with several other banks, was making 70% profit margins on the insurance sales after moving their operations to Dublin, where they enjoyed a lower tax rate.

An Office of Fair Trading report in 2006 found flaws in the sales techniques used by bank staff to sell the insurance. It also said its initial findings pointed to a lack of competition among banks.

The OFT passed its findings to the Financial Services Authority, the main City watchdog, and the Competition Commission for further investigation.